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I just moved to a new city and I'm currently renting and apartment for $575 a month. I got a full time job so now I can afford more so I was thinking of buying a property. I expect to live in the area for about 3 to 4 years which makes me think that renting might not be the best answer. I'm looking for a home around the 100k-125k range.

I want to emphasize that I'm not looking for a home just to have a home. I'm looking for the option that will give me the best financial return. My plan is to buy an inexpensive home in under average conditions and fix it up to increase its value. (Hopefully, at least 10%)

Is it better to get a 15 year loan so I get more equity, getting a 30 year (considering inflation) and rent out the property after I moved out, or just renting the same apartment?

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    Do you have renovation experience or will it be a first-time endeavor? – Hart CO Mar 7 at 16:01
  • "and rent out the property after I moved out" how much will you be able to rent it out for once you've completed the repairs? – RonJohn Mar 7 at 17:35
  • Have you looked at what the historical max drawdown is for homes in your period, and where your home is valued currently with respect to historic values? Flipping is a 6 week thing, not a multi-year thing, especially if you don't plan to stay in the area. When you say you plan to move, how far away? So many variables. – John Zabroski Mar 7 at 18:16
  • @PeteB. The reason why I think my case has a little twist is because I'm adding the remodeling factor to decrease the loss. – Alan Saines Mar 7 at 22:59
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I expect to live in the area for about 3 to 4 years which makes me think that renting might not be the best answer.

The threshold here is five years. So if this were all, you would be better off renting. The reason is that within five years, the closing costs will eat up all your equity.

My plan is to buy an inexpensive home in under average conditions and fix it up to increase its value.

So buy a home. Improve it. Live in it. Then sell (flip) it. That could work, even with the three to four year time frame being less than the five year threshold. That's because the higher selling price may offset the closing cost losses.

This is the situation for which a five-year adjustable rate mortgage with a balloon payment at the end is designed.

Some issues to consider:

  1. Do you actually have any experience at this? It's quite possible to lose money due to selecting the wrong house, making the wrong changes, or hiring the wrong contractor. In general, I wouldn't recommend this approach unless you plan on doing it repeatedly. The reason being that if something goes wrong, that's a learning experience for someone doing this repeatedly. But it's a major financial hit for no gain for someone just doing this once.

  2. Are you sure that the local market in three to four years will be as good as the market now? For example, if you had done this in Miami or Las Vegas in 2006, your property would have likely lost half its value if you tried to sell in 2009.

  3. What will you do if you lose your job? If renting, your worst case is breaking your lease. But if you own, you may be stuck paying a mortgage on a property where no one is living (e.g. if you moved to a different city to get another job).

It is possible to make very good returns with this kind of plan. But it is also possible to take big losses. That risk is part of why the potential gains are high.

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    There is no set time threshold, it depends on market growth. – Hart CO Mar 7 at 18:44
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I'm looking for the option that will give me the best financial return.

A 15-year mortgage gives you the better return than a 30-year because the interest rate is lower. Paying down principal faster will be roughly a wash since you plan to sell in 3-4 years.

In either case, you should have at least a 20% down payment to avoid Private Mortgage Insurance, which is a significant expense. If you don't have that, then it might be better to rent even for 3-4 years while you save up a down payment.

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If you were just going to live there, then closing costs would eat up any possible benefits.

But your plan is to flip it. Thus, it's a business proposition which is fundamentally different from every other part of your question.

And flippers, I think, usually get ARMs, have DIY experience, and try to buy & sell FSBO to eliminate realtor overhead.

  • This sounds like a multi-year, live-in situation, so not really easily comparable to normal flip. – Hart CO Mar 7 at 17:20
  • @HartCO the question is ambiguous. – RonJohn Mar 7 at 17:27
  • "rent out the property after I move out" and the alternative to buying: "or just renting the same apartment" – Hart CO Mar 7 at 17:30
  • @HartCO if he stays in the same apartment, then he's thinking of flipping the house. Too many variables to give a good answer. – RonJohn Mar 7 at 17:37
  • Fair enough, I interpreted those sentences as meaning he'd live in the house and renovate to get greater return in 3-4 years or he wouldn't buy at all but keep renting, in either case, lots of variables indeed. – Hart CO Mar 7 at 17:38

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